Investing in exchange traded funds (ETFs) incurs ongoing costs - like the total expense ratio - that are deducted within the fund and reflected in the price of the shares. In addition, there are costs to acquire the ETF units.
Acquisition costs
1. Through a stockbroker
If you are investing in an ETF through a stockbroker, you will pay:
These costs together make small share purchase less worthwhile. Reinvesting your dividends may also attract these costs.
2. Through an investment platform
If you are investing on a platform that works through a broker, you may pay:
Administration fees are typically higher when you start investing but reduce as you invest more through the platform.
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THE COSTS OF BUYING ETFs Brokerage: this can range from 0.08% to 0.9% of the amount you invest and there may be a minimum brokerage fee – anything from one cent to R120. The brokerage fee may be negotiable. Strate settlement fee: this is a fee paid to the authority that ensures your legal ownership of a share, bond and other securities is held accurately and safely. Strate stands for Share Transactions Totally Electronic. The fee you pay is 0.0054787% of the value of the shares you buy, but a minimum of R7.84 applies if you buy for less than R134 000. If you buy shares valued at more than R1.6 million, a maximum fee of R93.38 applies. VAT is added to these fees. The investor protection levy: this is a fee levied by the Financial Sector Conduct Authority of 0.0002% of the value of the shares you buy. Securities Transfer Tax: you pay tax of 0.25% of the shares you buy. |
Generally, if you are investing small amounts, an investment platform works out cheaper than using a stockbroker, but when your investments or trades are substantial, it is cheaper to use a stockbroker.
Remember that the administration fees apply on an ongoing basis to the full amount you have invested while brokerage is charged on the new amounts you invest – including dividends reinvested.
Some platforms charge a fee – typically a set rand amount - for processing debit orders when you invest on a recurring basis, and debit orders that are rejected incur even higher fees. Your bank may allow you to set up a monthly recurring investment with no fees and with no rejection fees.
3. Bid/offer spreads
When you want to buy an ETF – through a stockbroker or bulked by a platform through a broker - there must be someone willing to sell to you and when you want to sell there must be a willing buyer, but sometimes there isn’t a buyer.
ETF providers therefore appoint stock brokers to “make the market” so you can always sell an ETF when you want to - this is a JSE listing requirement for all exchange traded products. These market maker stock brokers ensure that you can always sell your ETFs even when there are no buyers.
Market makers cover their costs for this service through the difference between the price at which you buy an ETF and the price at which you could sell it on the same day. This is referred to as the bid-offer spread. You will only be able to establish this cost when you buy or sell ETFs.
Ongoing costs for managing the fund
ETFs and other index-tracking funds have some of the lowest ongoing management fees, but you should still check what these are.
If the ETF is a collective investment scheme, the ongoing costs – covering the management fees, custody fees, audit fees and taxes - within the fund are disclosed by way of the total expense ratio.
ETF fund fact sheets will also disclose the transaction costs – the trading costs incurred for buying and selling of underlying assets in the index or for a commodity.
Both of these should be expressed as the percentage of the amount you invest that was spent on charges over the past year.
These costs are deducted within the fund so are already factored in to the price or net asset value of your ETF. Costs are recouped daily at the daily rate of the annual TER.
What it will cost you for years to come
If you invest through an investment platform or in a tax-free savings account or retirement annuity, you should also be quoted the effective annual cost (EAC). A stockbroker, however, is unlikely to disclose this cost to you.
The EAC shows you four kinds of charges (including VAT) that you can expect to pay over different time periods. The four cost components are:
The EAC must be calculated separately for each of the four components and totalled to produce an EAC figure for the financial product, expressed as a percentage. All charges that an investor will incur must be included in the EAC measure. When a charge is not available, a reasonable best estimate must be used.
